Pension Swaps, Austria Banks, SEC, Madoff: Compliance

Carla Main

February 25, 2013, 8:34 AM EST

The U.S. Labor Department said $6.8 trillion in pension funds can be invested in cleared swap transactions as long as certain conditions are met.

The market for privately negotiated derivatives, with $639 trillion in notional value as of June, is being regulated for the first time in its three-decade history, requiring most trades to be backed by a clearinghouse where banks and brokers act as intermediaries. The Labor Department already allows pension funds to be invested in futures contracts under similar guidelines, said Supurna VedBrat, co-head of market structure and electronic trading at BlackRock Inc.

The role of clearing was expanded by the 2010 Dodd-Frank Act based on the track record of clearinghouses during the credit crisis. The idea took hold after Lehman Brothers Holdings Inc. failed in 2008 and LCH.Clearnet Ltd., the world’s largest interest-rate swap clearinghouse, settled $9 trillion of the derivatives held by the New York-based investment bank.

Pension investments are governed by the Employee Retirement Income Security Act, or Erisa. It sets fiduciary standards that plan managers must follow, among other requirements.

The Labor Department said on its website Feb. 7 that default procedures and other clearinghouse rules don’t breach Erisa fiduciary standards if they are spelled out in preliminary clearing agreements. Margin payments don’t constitute plan assets and clearing members don’t have a fiduciary duty while closing out a pension-fund customer account that has defaulted, the Labor Department also said.

The conclusion is important because it means an asset manager such as BlackRock won’t have to tailor investment strategies for funds that contain money governed by Erisa and those that don’t, VedBrat said. It also allows access to the added protection of clearing to pension investments, she said.

The market for swaps, in which investors trade payments for as long as 30 years, is measured by notional value to calculate money flows and doesn’t represent cash that has changed hands.

Compliance Policy

Austria to Allow Regulators Early Intervention in Failing Banks

Austria’s bank regulator will be authorized to order banks to sell assets, raise capital or restructure liabilities when they begin to run into trouble, according to a draft law presented by the government.

The Finanzmarktaufsicht regulator, which oversees lenders in the Alpine republic together with the central bank, will be able to intervene before a bank actually falls below legally mandated capital levels, according to the draft released by the finance ministry Feb. 22. Lenders would have to draw up advance plans, or living wills, for how to restructure and wind down their business in a crisis. The law is scheduled to enter into force next year if it passes parliament.

Austria, which lost its top debt rating at Standard & Poor’s last year mostly because of its banking industry, has 19.8 billion euros ($27 billion) at risk after it nationalized three lenders on the brink of collapse between 2008 and 2012. The bank restructuring law, which preempts European Union rules still under consideration in Brussels, was brought forward after last year’s nationalization of Oesterreichische Volksbanken AG.

Under the new law, a bank would have to specify measures needed to restore its financial health if it hits predefined triggers gauging its weakness. The measures to be prepared include the quick sale of assets, capital raisings, and debt restructurings.

U.S. Consumer Bureau Seeking Comments on Student-Debt Policies

The U.S. Consumer Financial Protection Bureau is seeking public input on possible policies to ease repayment of student loans, the agency said in an e-mailed statement.

The CFPB is asking for input on how student loans might affect the broader economy and impede access to other forms of credit. It also wants to collect more information on how struggling borrowers manage their loan repayments, options for lowering monthly payments and examples of repayment plans in other markets that might work for student loans.

In a July report to Congress, the CFPB and Education Department said that “too many student loan borrowers are struggling to pay off private student loans that they did not understand and cannot afford.” Aggregate private student-loan debt amounted to about $150 billion at the time, representing 15 percent of total education debt, the report said.

About 30 lenders issue private loans. Among the largest are SLM Corp., better known as Sallie Mae; Wells Fargo & Co.; and Discover Financial Services, according to the Washington-based Consumer Bankers Association.

The regulator is also working on detailed regulations on the RQFII program for Taiwanese investors, according to the report.

The qualified foreign institutional investor, or RQFII, program, allows the investing of offshore yuan in China.

Compliance Action

NYSE Considering Changes to Disaster Recovery Model After Sandy

NYSE Euronext, owner of the largest U.S. equities exchange, is considering ways to improve its plan for dealing with disasters and said exchanges should consider mandatory testing after Hurricane Sandy caused the longest weather shutdown since 1888.

The exchange industry should weigh whether regular testing of connectivity and backup facilities should be mandatory, according to comments NYSE Euronext e-mailed Feb. 22 in response to questions from a U.S. Senate committee concerning computerized trading venues.

Trading was halted for two days at the end of October when concerns about human safety and how well the New York Stock Exchange’s backup plan would work convinced executives that moving ahead was too risky. The Securities and Exchange Commission may consider whether exchanges’ emergency regimens need to be bolstered, a person familiar with the regulator’s thinking said in November. The person asked not to be named because the matter is private.

FCC Should Study Ways to Improve Receiver Performance, GAO Says

The Federal Communications Commission should study ways to improve performance by receivers, the GAO said in a report.

The Government Accountability Office cited increased demand for radio spectrum in support of its conclusion.

Government policy has focused on transmitters, the GAO noted. Receivers play a role when interference happens, the GAO said in the report.

The report looks at ways to improve receiver performance.

LightSquared’s proposal for a nationwide wireless network was stopped by the FCC amid concerns over interference to other services.

RBS Said to Plan IPO for U.S. Citizens Financial Group Unit

Royal Bank of Scotland Group Plc, Britain’s biggest government-owned lender, will signal this week it plans to sell a 15 percent to 25 percent stake in its Citizens Financial Group Inc. unit, according to a person familiar with the plan.

No deal is imminent and the process will probably take about two years to complete, the person, who asked not to be named because they were not authorized to speak publicly on the matter, said Feb. 23. RBS will announce the move when it reports full-year earnings on Feb. 28.

RBS, based in Edinburgh, has been under pressure from U.K. Financial Investments Ltd., the steward of the government’s 81 percent stake in the bank, and lawmakers to sell the U.S. consumer and commercial lender it acquired in 1988. Chief Executive Stephen Hester said in August the bank would keep hold of Rhode Island-based Citizens because it’s a “core” part of the company that will be more valuable in three years.

The Telegraph newspaper, which reported the possible IPO Feb. 23, said a full sale of Citizens could ultimately raise 8 billion pounds ($12.13 billion).

Canada’s Toronto-Dominion Bank held informal talks to buy the unit, the New York Post reported on Aug. 3, without saying where it got the information.

An RBS official declined to comment when contacted by Bloomberg News.

Hester has cut assets by more than 800 billion pounds, eliminated 36,000 jobs and scaled back RBS’s securities and Irish units since he took over from Fred Goodwin in 2008.

Kabel Deutschland Buy of Tele Columbus Vetoed by Cartel Office

Kabel Deutschland Holding AG’s plan to acquire Tele Columbus Group was vetoed by Germany’s antitrust regulator, which said the concessions offered weren’t enough.

The takeover would have strengthened the existing nationwide oligopoly held by Kabel Deutschland, Germany’s biggest cable company, and Unitymedia KabelBW GmbH, the Federal Cartel Office in Bonn said in an e-mailed statement Feb. 22. Even with the concessions Unterfoehring-based Kabel Deutschland had offered, competition would have been gravely impaired, the office said.

The company said in May it would buy Berlin-based Tele Columbus for 603 million euros ($795 million) plus accrued interest to reach more pay-television households. Creditors took ownership of Tele Columbus after a debt restructuring.

Kabel Deutschland is itself the target of a potential bid by Vodafone Group Plc.

Turkey Antitrust Board to Hear Bank Defenses Today, Tomorrow

Twelve Turkish banks are expected to present verbal defenses in a probe into alleged collaboration in setting interest rates on loans, Competition Board Chairman Nurettin Kaldirimci said in televised comments in Ankara today.

The pension, health-care and benefit funds for bricklayers, construction workers, electrical workers and others don’t qualify as “customers” of Madoff under the Securities Investor Protection Act and are not eligible for recovery, the appeals court in Manhattan said Feb. 22.

The funds invested in Spectrum Select LP and Spectrum Select II LP, which in turn invested in hedge funds Rye Select Broad Market Fund LP and Rye Select Broad Market Prime Fund LP, according to the ruling. The Rye funds funneled capital to Madoff’s firm, according to the ruling.

The worker funds, including the Bricklayers and Allied Craftsman Local 2 Annuity Fund, the Central New York Laborers Annuity Fund, and the International Brotherhood of Electrical Workers Local Union NO. 43 and Electrical Contractors Pension Fund, appealed from previous rulings by a bankruptcy court and federal district court.

The case is In Re: Bernard L. Madoff Investment Securities LLC, 12-410, U.S. Court of Appeals for the Second Circuit (Manhattan).

Interviews

SEC Enforcement Chief Sees Priority Shifting From Crisis Cases

George Canellos, the Securities and Exchange Commission’s acting enforcement chief, said his unit is at an “inflection point” in redefining priorities previously focused on conduct related to the 2008 credit crisis.

Investigators are now looking at the conduct of gatekeepers such as accountants and board members, new and evolving market technologies, and activity in the private equity industry in an environment of low interest rates, Canellos said Feb. 22 during a panel discussion at a securities law conference in Washington.

The SEC overhauled the enforcement division in 2010, creating specialized units to focus on areas such as structured products that helped fuel market turmoil in 2008 after the U.S. housing market collapsed. An enforcement advisory committee has been set up to evaluate new priorities, according to David Bergers, the enforcement division’s acting deputy director.

The primary goal of the advisory panel is to make it easier for SEC attorneys to investigate and litigate cases, Bergers said, adding that the agency is more aggressively seeking to enforce subpoenas when companies delay requests for documents.

The enforcement unit is working on a tool that can help predict accounting fraud by mining information in public filings and identifying outliers in discretionary accruals, he said.

She made the remarks in prepared comments for a conference in Washington Feb. 22 at the Practicing Law Institute’s SEC Speaks Conference.

“Bank capital requirements are important, as is increased prudential regulation of systemically important financial institutions, but as we work to limit systemic risk, we don’t want to discourage all risk-taking,” Walter said, according to her prepared remarks.

“Soon, crowdfunding will bring the potential for a broader range of investors to provide private capital, though their investments will and should be limited,” Walter said, touching on the trend for raising capital in small amounts known as crowdfunding.

Krawcheck Says Banks Seeking ‘Right Thing’ for CEO Pay

Sallie Krawcheck, former head of Bank of America Corp.’s wealth-management division, talked about compensation and job cuts in the banking industry, and the importance of financial advisers.

Executive pay has been an important topic in compliance policy in the years following the financial crisis.